Investments by venture firms lowest since 1998

Tech firms still get most money

May 28, 2001|By Hui-Yong Yu, Bloomberg News.

New investments by U.S. venture capital firms plunged 56 percent in the first quarter to the lowest level in more than two years, a recent survey said.

Venture investments fell to $11.7 billion from $26.7 billion a year earlier, according to Venture Economics and the National Venture Capital Association. That was the lowest since $6.2 billion was invested in the fourth quarter of 1998, the survey said.

Investments dropped as the plummeting stock market and the slump in technology capital spending caused the venture-investing industry to question the long-term payoff from new companies, analysts said. Also, with the market for new stock offerings nearly frozen over, many venture firms have no way to cash out of previous investments by bringing the companies public.

"The last six months have been the most difficult in the last decade," said Bill Elmore, a general partner of Foundation Capital, a backer of Commerce One, Onyx Software Corp. and other companies. "The dot-com hangover is still lingering, and many venture firms are still working through that."

Yet many venture capitalists still have hefty sums to invest, thanks to record fundraising from institutional and individual investors in recent years. An estimated $35 billion remains on the sidelines waiting to be put to work, said Mark Heesen, president of the venture capital association.

"You're coming off a record year in dollars invested," said Joe Aragona, a general partner at Austin Ventures. "We put out about $40 million in the first quarter, and about half of that money is new investments. That was about 60 percent to 65 percent of our pace in the first quarter of 2000."

Some funds continue to attract investors. Foundation Capital recently closed its fourth fund, with $595 million in commitments from investors--about 50 percent more than its target, Elmore said.

Part of the reason for continuing to raise money is to ensure the firm can support previously funded young companies that might take longer to go public, Elmore said.

"If the IPO window is shut for a long time, funds will need to have plenty of money" from private sources, he said.

Some venture capitalists are optimistic that the market for initial stock offerings will bounce back.

"We've been investing 15 years, and this is the third serious closure of the IPO window we've seen," said Steve Lazarus, founding partner of Arch Venture Partners, which recently raised $380 million for a new fund. "You manage through. There's the expectation that the IPO window will reopen. It always has."

Health-care companies may have the best near-term chance among venture-backed start-ups seeking to go public, said Mitchell Blutt, executive partner with J.P. Morgan Partners.

Despite heavy tech losses, venture capitalists continue to funnel most of their dollars--about 75 percent of the total invested in the first quarter--into Internet-related companies, the funding survey showed.